United Kingdom House of Commons Treasury Committee Issues Report on Anti-Money Laundering and Sanctions

On March 8, the United Kingdom House of Commons Select Treasury Committee published a report on economic crime that focused on anti-money laundering (AML) supervision and sanctions implementation in the United Kingdom. The report, which received unanimous approval by the Committee, was critical of the United Kingdom’s “fragmented approach to AML supervision.”

The scale of economic crime – which the National Crime Agency (NCA) defines as covering a range of crime, including money laundering, crimes covered by the NCA’s International Corruption Unit (ICU) (e.g., foreign bribery and related money laundering), fraud, and counterfeit currency – is “difficult to ascertain and official estimates of the scale of economic crime are highly uncertain.”

It “can reasonably be said to run into the tens of billions of pounds, and probably the hundreds of billions,” but “the upper bound of the estimate is unknown.”

Because the United Kingdom “holds a prime position in global financial services, with the City of London a dominant financial centre,” recent moves by the United Kingdom Government to keep the City “clean” “are welcome, but must be sustained.”

Given the United Kingdom’s expected departure from the European Union (EU), the Government should retain or replicate “the arrangements with the EU to maintain the flow of information between the UK and EU member states’ law enforcement agencies on economic crime,” and the Government should “work to develop strong relationships with other countries and strengthen mutual information sharing and law enforcement power.”

Recognizing the substantial amount of time between the Financial Action Task Force’s mutual evaluation review of the United Kingdom’s anti-money laundering and counter-terrorist financing systems, the Government should “institute[e] a more frequent system of public review of the UK’s AML supervision, and law enforcement, that will ensure a constant stimulus to improvement and reform. This review should take a holistic view of the entire system, rather than be undertaken by each individual component supervisor or agency.”

Fragmented Approach to AML Supervision:

The “fragmented nature” of the United Kingdom’s AML supervisory regime is reflected in the fact that there are 25 entities currently responsible for AML supervision.

While the property sector “poses a risk from an anti-money laundering perspective . . . the AML supervisory regime around property transactions is complicated.” HM Revenue and Customs (HMRC) should “carr[y] out further work to ensure estate agents are registered with them and following best anti-money laundering practice.”

As “[t]here is a clearly identified risk that company formation may be used in money laundering” and “there appears to be a number of unsupervised entities engaged in company formation,” HMRC should identify and deal with them “as a matter of urgency.”

Companies House, whose role is to incorporate and dissolve limited companies and register company information and make it available to the public, has a number of weaknesses in the controls around the information it houses, including not being required to carry out AML checks and not rigorously checking the “people with significant control” (PSC) register. Accordingly, “[t]he Government must urgently consider reform of Companies House to ensure it has the statutory duties and powers to ensure it plays no role in helping those undertaking economic crime . . . .”

There should be “a sharp focus on the supervision of the core financial services,” and the Financial Conduct Authority (FCA) should “keep up a constant pressure” on those businesses “and take appropriate enforcement action against them.”

Other Issues:

Resources: “The resources to combat economic crime available to the private sector dwarf those currently available to the public sector.” Because of concern for maintaining public-sector expertise to combat economic crime, considering the salaries available in the private sector, “[t]he Government and public sector bodies should consider whether there is the pay flexibility available to ensure that the appropriate skills are maintained.”

Suspicious Activity Reports: The program for reform of the Suspicious Activity Reports (SARs) system is “an exceptionally important piece of work for the AML regime.” Reform “should focus on increasing the number of SARs reports by those outside the core of the financial system, the so-called enablers.”

Politically Exposed Persons: The Government should create a centralized database of Politically Exposed Persons (PEPs) for the use of those registered by AML supervisors.

“Derisking”: The Government should publish its strategy on how to address disproportionate derisking strategies within six months.

Legislative Reform:

On corporate criminal liability, in view of “clear evidence that legislative reform is required to strengthen the hand of law enforcement in the fight against economic crime,” the Government should set out “a timetable for bringing forward legislation to improve the enforcement of corporate liability for economic crime,” taking into account the Serious Fraud Office’s suggested reforms.

Financial Sanctions:

The Government should review the effectiveness of the Office of Financial Sanctions Implementation (OFSI), which has been in existence for only a year and a half, two years after its formation.

Recognizing that “certain elements of Russian money” have had “a malign influence” on the United Kingdom financial system, the Government “must achieve a balance between focussing on financial flows from one country, while not distorting the AML system, and creating a risk that other criminals slip by while attention is focussed on individuals with a specific nationality.”

“The United Kingdom’s departure from the European Union could allow additional flexibility in its use of sanctions, though there will always be a need to ensure a multilateral approach.”

The Committee also posted a complete list of its conclusions and recommendations. It plans to issue a second report on economic crime, focusing on consumers and economic crime, later in 2019.

Note: This report provides a thorough and detailed review of the state of affairs with the United Kingdom’s response to money laundering. While it is consistently methodical in its analysis and temperate in tone, it constitutes a wide-ranging criticism of the United Kingdom Government’s attention and dedication of resources to the problem. That criticism – coupled with the recent disclosure that there had been no prosecutions under the United Kingdom money-laundering regulations between their inception in June 2017 and October 2018 – should prompt the Government to undertake comprehensive improvements in and support for its AML regime, particularly if Brexit results in decoupling the United Kingdom from the EU and its own AML initiatives.

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Published by Jonathan J. Rusch

I'm a lawyer and consultant interested in corporate- and individual-compliance issues, and an inveterate part-time law professor; a former federal prosecutor, regulator, and anti-bribery and corruption compliance head at a global financial institution; and a (very minor) shareholder in Williams Grand Prix Engineering.
View all posts by Jonathan J. Rusch